Middle-market M&A expert Alan Scharfstein explains exit readiness, business valuation, private equity, strategic buyers, succession planning, and life after the sale.
Preparing a privately held business for sale is not a last-minute process. Founders can improve their options—and potentially their valuation—by becoming “exit ready” years before a transaction. In this episode of the Palumbo Podcast, Philip Palumbo speaks with Alan Scharfstein, founder and CEO of The DAK Group, who has spent four decades advising middle-market business owners and negotiating hundreds of transactions. Scharfstein explains how buyers evaluate sustainable earnings, management strength, recurring revenue, customer concentration, supplier dependency, and whether a company can prosper without its founder. His guiding principle is simple: run the business as though you will own it forever, but be prepared to sell it tomorrow.
The conversation also explores how to evaluate private equity firms, why seller due diligence should be a two-way street, what makes a multigenerational succession plan viable, and how strategic buyers may justify a higher valuation through cost savings, broader distribution, and cross-selling opportunities. Palumbo and Scharfstein also address the question many owners overlook: after selling on Friday, what will you do on Monday? Whether you are considering a full sale, a partial sale, a transfer to the next generation, or simply building a stronger company, this discussion offers practical guidance on reducing buyer risk, creating competition among buyers, selecting the right transaction partner, and protecting the value of a founder’s life’s work.
Key Insights: How to Prepare a Privately Held Business for Sale
When should a business owner begin preparing for a sale?
Business owners should begin preparing years before they expect to sell. Alan Scharfstein advises founders to remain “exit ready” even when a potential sale is 10 or 20 years away. Advance preparation gives an owner time to strengthen the business, respond to an unexpected opportunity, and potentially achieve a better transaction.
What factors can increase the value of a privately held business?
Buyers evaluate more than earnings. They examine whether the management team can operate the company without the founder, whether revenue is recurring, and whether the business is overly dependent on a particular customer or supplier. Strengthening these areas can reduce perceived buyer risk and may support a higher valuation or transaction multiple.
How should a founder evaluate a private equity firm?
Founders should conduct due diligence on a private equity firm—especially when they will retain equity or continue working in the business. Scharfstein recommends examining the firm’s investment plans, ownership horizon, use of debt, financial commitment, and response when a portfolio company encounters difficulties. Owners should also speak directly with founders of companies the firm has previously acquired.
What makes a family-business succession more likely to succeed?
A successful family-business succession requires an honest assessment of whether the next generation has the ability, experience, and training to lead. Owners should establish a clear long-term plan, define how family members will be evaluated, and avoid placing a successor in a role for which that person is not prepared.
Why might a strategic buyer pay more for a business?
A strategic buyer may value a company based on buyer-specific economic benefits, including reduced overhead, broader distribution, cross-selling opportunities, and increased profitability. Sellers should understand what the business may be worth to each particular buyer rather than relying only on a standard industry multiple. A competitive sale process can also increase valuation by creating competition among qualified buyers.
What should a founder decide before selling the business?
A founder should determine what life will look like after the sale before completing the transaction. That includes deciding whether to sell all or part of the company, remain involved, start another business, pursue charitable work, or retire. As the interview asks: after selling on Friday, what will the owner do on Monday?
About the Guest
Alan Scharfstein is the founder and CEO of The DAK Group, a middle-market investment bank focused on mergers, acquisitions, business sales, valuation, and strategic advisory services for privately held companies. During the interview, Scharfstein describes four decades of work with entrepreneurial and family-owned businesses and involvement in more than 800 transactions. Before founding The DAK Group in 1984, he held financial and operating roles at PepsiCo and Universal Folding Box. He earned a BS in Economics and an MBA from the Wharton School of the University of Pennsylvania.
Editorial Note
This transcript has been edited for clarity, grammar, and readability. Repetitions, filler words, false starts, and obvious transcription errors have been removed or corrected. The speakers’ substantive meaning has not been intentionally changed. Company statistics, market observations, and examples reflect statements made during the recording and should not be read as guarantees of future transaction outcomes.
Opening: Why Founders Should Always Be Exit Ready [00:04]
Alan Scharfstein: If you are thinking about selling your business in the next two or three years, the time to begin preparing is today—or even earlier. A sale is not something that typically happens overnight. I always say: be exit ready.
Even if you are not planning to sell for 10 or 20 years, you should still be exit ready. The steps that make a company ready for a buyer can also help maximize its value, increase the multiple someone may be willing to pay, and produce a better transaction for the owner. A business owner should be able to step back and ask, “What is really going to create value here, and how do I implement those changes?”
Introduction to Alan Scharfstein and The DAK Group [00:41]
Philip Palumbo: Hello, everyone, and welcome. My name is Philip Palumbo, host of the Palumbo Podcast, where we interview successful business founders and professionals who work with founders in different ways.
Today, we are fortunate to have Alan Scharfstein with us. Alan is the founder and CEO of The DAK Group, a middle-market investment bank focused on mergers, acquisitions, and exit strategies for privately held businesses.
Over the last four decades, Alan has personally led or negotiated hundreds of transactions across a wide range of industries in the United States and abroad, helping entrepreneurial owners maximize the value of what is often their life’s work. Before founding The DAK Group in 1984, Alan held senior financial and operating roles at PepsiCo and later at Universal Folding Box. That experience gives him a combination of sophisticated financial expertise and hands-on operating experience.
Alan earned both a BS in Economics and an MBA from the Wharton School of the University of Pennsylvania. He is a frequent lecturer on selling privately held businesses and negotiation strategy and has been quoted in publications including The Wall Street Journal, Businessweek, the Financial Times, and Time.
Alan, thank you for your time. I am looking forward to hearing about your experience.
Alan Scharfstein: Thank you, Phil. I am looking forward to the conversation.
What Does a Middle-Market Investment Banker Do? [02:02]
Philip Palumbo: Let us start with the basics. What exactly do you do as an investment banker?
Alan Scharfstein: We help privately held, family-owned, and entrepreneurial businesses determine how to maximize their value.
Sometimes that means selling the business. Sometimes it means preparing the company for a future sale. A transition does not necessarily mean selling to an outside party. It could mean transferring the business to the next generation, selling it to the management team, or simply determining how to operate the company in a way that maximizes its value.
What Should Founders Consider Before Selling a Business? [02:36]
Philip Palumbo: Maximizing value is especially important to founders who have spent decades building their companies and may now be considering a sale. What are the key things they should be thinking about?
Alan Scharfstein: There are several. First, the owner has to consider what a buyer will want to see in the business. It is not only about the way the owner has historically run the company. It is about what will be attractive to a particular buyer. The owner has to learn to think from the buyer’s perspective.
The second issue is what comes after the transaction. What does the owner want life to look like after selling the business? Owners have more options today than ever before. Do you want to sell the entire company or only part of it? Do you want to remain involved? Even if you want to exit completely, you should determine what you want to do afterward, because retirement does not work equally well for every entrepreneur.
How Should Founders Plan for Life After a Sale? [03:43]
Philip Palumbo: I often put it this way: if you sell the business on Friday, what are you going to do with your life on Monday and thereafter? How should founders think about life after a sale?
Alan Scharfstein: We spend a great deal of time discussing that question with owners before they even engage us, because we want to make sure a sale is the right decision for them.
We consider whether the timing is right in the broader economic environment, whether the business is performing at a high level, and what the owner wants to do next based on that person’s age, interests, and level of activity. Some owners have specific personal goals. Some have charitable intentions. Others want to start another business and move into the next phase of their entrepreneurial lives.
The key is to think carefully about what will be the right fit for you as the owner.
Why Should Owners Prepare Years Before a Sale? [04:41]
Alan Scharfstein: Another important point is that owners need to plan far enough in advance. If you want to sell in the next two or three years, you should begin thinking about it today—and ideally even earlier. Preparing a company for sale is not something that typically happens overnight.
Philip Palumbo: The problem is that many founders do not look up until a deal is already on the table. Before long, they are signing a letter of intent. If they had spent more time cleaning up and improving the business, they might have obtained one or two additional turns on the EBITDA multiple.
That is why I tell founders to always be exit ready. Even if you expect to sell in 10 or 20 years, operate the business so that it is best in class if a qualified buyer approaches you.
Alan Scharfstein: I agree. The advice we typically give is: run your business as though you are going to own it forever, but be prepared to sell it tomorrow.
Complete the improvements that a buyer will want to see before an opportunity appears. You do not want a competitor, private equity firm, or another well-capitalized buyer to approach you with an attractive opportunity and then have to say, “Come back in 16 months after I clean up the business.” You want to be able to act when the opportunity and timing are right for you.
What Factors Can Increase the Value of a Privately Held Business? [06:13]
Philip Palumbo: When a founder says, “I want to sell in the next two or three years,” or “I want to become exit ready,” what should that person do to maximize the value of the business?
Alan Scharfstein: Start with the fundamentals. Is the company being operated to maximize sustainable earnings? Buyers will look closely at the economics of the business.
They will also examine other factors that create or reduce value. How strong is the management team, and can that team carry the business forward without the founder? Is the company heavily dependent on one customer? Is it dependent on a particular supplier? Does any part of the business generate recurring revenue, which may be especially valuable to a potential buyer?
We often put owners through a test run based on the criteria a buyer is likely to use. If the business performs well against those criteria, it may already be attractive to the market. If it does not, the owner has time to address the weaknesses and improve the company.
Strengthening those areas can help maximize business value, may increase the multiple a buyer is willing to pay, and can lead to a better transaction for the owner.
Is Building a Professional Management Team an Expense or an Investment? [07:58]
Philip Palumbo: Not every company can create recurring revenue because of its business model. But suppose you are advising a founder whose company remains heavily dependent on that founder and has not been fully professionalized. The business might be worth $50 million or $100 million, but the founder resists the cost of hiring a CFO, COO, or even a CEO. How do you approach the need to build a stronger management team?
Alan Scharfstein: It is a real conundrum. Owners do not want to spend money unnecessarily. The right question is whether a proposed hire is simply an expense or an investment.
An owner should assess whether adding a person or capability to the team will generate an adequate return. Will that investment improve the company’s performance, make the business less dependent on the founder, or increase what a buyer is willing to pay?
A buyer generally looks at two sides of a business. The first is opportunity: Where can I grow this company? Where can I take it? The second is risk: What could damage the business after I complete the acquisition?
Customer concentration, supplier dependency, and the strength of the management team all affect buyer risk. When those areas are strong, they can reduce perceived risk and support a higher valuation.
Who Can Help an Owner Implement Value-Creating Changes? [09:52]
Philip Palumbo: There are business coaches who develop playbooks to help founders maximize value before the company is handed to an investment banker, attorney, or another transaction advisor. Does The DAK Group provide that type of assistance, and how is your approach different?
Alan Scharfstein: There are excellent coaches who help business owners perform at a higher level. For years, we met companies that were not quite ready to sell. We would recommend improvements, and the owners would tell us they needed someone to help implement those changes because they did not have extra hours in the day.
In response, we developed our Strategic Leadership Advisory practice. When we see a strong business that is not yet ready for a transaction and needs to be tuned up, we can help the owner implement the improvements.
Our approach is similar to coaching in some respects, but we bring a buyer’s perspective. We focus on the relatively small number of changes that are most likely to influence how a buyer perceives value when the time comes to negotiate.
Do Operational Improvements Matter Even When a Sale Is Not Imminent? [11:18]
Philip Palumbo: How long can it take a founder to implement the changes needed to maximize value?
Alan Scharfstein: In some cases, the work is not being done for the purpose of selling. It may be intended to increase the value and performance of the company overall. An owner may want to prepare the next generation to enter the business, transfer responsibility to the management team, or simply improve profitability.
It is difficult for an owner to look at the company from the outside. Founders are deeply involved in day-to-day operations and may not have time to step back and ask what will create the most value or how to implement the necessary changes.
Just as owners often need experienced professionals when they sell a business, they may also benefit from outside help when they are trying to improve the company’s performance.
Philip Palumbo: Is that a separate service, even when you are not acting as the investment banker selling the company?
Alan Scharfstein: Yes. The work is not necessarily tied to an investment-banking engagement. It is designed to help the owner improve business operations. A frequent result is that the owner builds a much more sellable company, even if a transaction is not the immediate objective.
How Long Can an Advisory Relationship Last Before a Sale? [13:02]
Alan Scharfstein: In our business, it is not unusual to have a relationship with an owner for two, three, 10, or even 20 years before the company is ready to sell.
We also help owners build value in other ways. For example, an acquisition may be accretive to value. A company may be able to grow through a nonorganic strategy and perform at a higher level. We look at the business holistically and try to determine what is right for that particular owner and company.
When Should a Business Owner Decide Not to Sell? [13:34]
Alan Scharfstein: I would say we spend about half our time talking business owners out of selling.
Philip Palumbo: Why would you advise an owner not to sell?
Alan Scharfstein: Sometimes it is simply too early. The owner may not have thought through all of the issues, including what will come next and whether that next phase will be satisfying.
In other cases, the business still has substantial runway for growth. Selling too early could leave significant value on the table. Owners also have more choices today than previous generations did.
In my father’s generation, an owner often ran the business until retirement, sold it, and ended a career. Today, many owners sell at younger ages. In our experience, the typical seller was about 67 years old a decade ago, often because no one else was entering the business. More recently, our average seller has been about 52.
Many of those owners are not leaving the company entirely. Some bring in private equity, remain involved, and use the new capital and resources to grow the business. They take some chips off the table to create financial security for their families while retaining the possibility of future upside.
Do Private Equity Firms Usually Buy Minority or Majority Stakes? [15:40]
Philip Palumbo: Founders receive frequent calls from private equity firms. Do you more often see a private equity firm buy a minority interest, such as 30%, or a controlling interest of 50%, 60%, 70%, or 80%, with the founder retaining the balance?
Alan Scharfstein: It is relatively unusual for a private equity firm to take only a minority stake. Most firms want a controlling position, generally more than 50%, although the structure depends in part on what the seller wants.
Private equity firms often ask the seller to roll some equity into the business. We have also completed transactions in which the buyer paid all cash for 100% of the company. In many cases, however, the buyer wants the owner to remain involved and help transition or continue operating the business.
A financial firm buying a platform company usually needs an experienced management team to run it after the acquisition. In addition, many private equity firms now own platform companies that are acquiring add-on businesses. In those transactions, the platform may evaluate the acquisition much more like a strategic buyer than a purely financial buyer.
What Can a Partial Sale to Private Equity Accomplish? [17:27]
Philip Palumbo: When private equity buys a majority position, does the founder typically remain until the next exit?
Alan Scharfstein: Sometimes. Every situation is different. We have worked with family businesses in which one generation left after the sale while the next generation remained and helped run the company.
That structure allowed the older generation to cash out while the younger generation retained an interest and had the opportunity to increase the value of its holdings. Private equity provided funding for expansion and growth. The right structure depends on the family, the business, the buyer, and the owner’s objectives.
How Should Founders Evaluate a Private Equity Firm? [18:07]
Philip Palumbo: Some owners see private equity as a major opportunity, while others are fearful because they have heard negative stories. What should founders understand?
Alan Scharfstein: Every private equity firm has its own DNA. Some are firms I would gladly do business with, and others are firms I would avoid as a partner. One part of our role is understanding those differences and helping clients identify firms with which they may—or may not—want to do business.
Private equity professionals are typically smart, experienced dealmakers. A founder should have an equally capable team that knows how to negotiate with them and evaluate what they intend to do.
The owner should have an honest conversation with the firm about its plans. How long does it expect to own the business? What does it intend to do with the company? Will it invest additional money? How much leverage will be placed on the business? How much of the private equity firm’s own capital is going into the transaction? Those questions help the owner understand the risk profile being created.
Why Should Due Diligence on Private Equity Be a Two-Way Street? [19:31]
Alan Scharfstein: One of the biggest mistakes owners make is believing that due diligence is a one-way street—that the private equity firm can investigate every aspect of the company while the seller simply accepts the process.
That is not the right approach. If you are selling to private equity, particularly if you are rolling equity and becoming the firm’s partner, you should conduct as much diligence on the buyer as the buyer conducts on you.
Talk with leaders of other companies the firm has acquired. Speak with the former or continuing owners. Find out what life is like after the transaction. Ask what happens when a portfolio company encounters a setback. Does the private equity firm panic, or does it work constructively with management?
Those factors can make an enormous difference. A business owner who conducts careful diligence is more likely to identify a strong partner, whether that partner is a private equity firm or a strategic buyer.
What Makes a Multigenerational Business Succession More Likely to Succeed? [20:37]
Philip Palumbo: Let us talk about multigenerational and legacy planning. When I left UBS and went independent on January 17, 2020, one of my objectives was to create a business that could become multigenerational for one, two, or all three of my sons if they are interested.
What positive and negative situations have you seen when an owner transfers a business to the next generation?
Alan Scharfstein: First, the owner has to determine whether the next generation is genuinely capable of performing at the required level. Have the successors received the experience and training they need? Can they lead the business effectively?
If they can, that is terrific. If they cannot, the owner faces difficult decisions. You do not want to place a son or daughter in a position in which that person is likely to fail.
Family businesses also face complex dynamics when only some members of the next generation work in the company. One child may be involved in the business while two or three siblings are outside it. The family then has to consider whether it is fair or prudent to make everyone’s financial future dependent on the performance of the one child running the company.
The owner has to be honest—with both the family and himself or herself—about how the transition will work and how the family will evaluate whether the plan remains viable over the long term.
Philip Palumbo: The probability of successfully transferring a business to the next generation is often said to be low. Do you agree?
Alan Scharfstein: The outcome varies tremendously. We are currently representing a fourth-generation family in which the fourth generation has performed at an exceptional level.
At the same time, it is unusual for businesses to continue beyond the second generation. The families that succeed tend to be those that develop the plan carefully, explain it clearly to the next generation, provide the necessary preparation, and set the successors up for success.
Why Might a Strategic Buyer Pay More for a Business? [23:19]
Philip Palumbo: One of the topics that interested me most when we previously spoke was strategic buyers. A strategic buyer can sometimes justify a higher multiple than a nonstrategic buyer. You described situations in which an owner expected perhaps seven or eight times EBITDA but ultimately received a much higher multiple because of the value to a particular strategic buyer. How should sellers think about strategic buyers?
Alan Scharfstein: A seller and the seller’s advisor should not look only at the company’s existing economics.
People may say that companies in a particular industry sell for a standard multiple of earnings or EBITDA. I call that the elementary-school version of valuation. The more important question is how a specific buyer will view the business and what the economics will look like after the acquisition.
For example, a buyer may be able to eliminate duplicative overhead, increasing EBITDA. It may be able to distribute the seller’s product through a much larger network. The two companies may be able to cross-sell products or services to one another’s customers, creating new revenue and profit opportunities.
The challenge is to determine what the strategic buyer may earn from the acquired business. Suppose the seller generates $1 million in profit, but the buyer believes it can generate $2 million or $3 million after combining the businesses. The seller and advisor should understand that economic benefit and attempt to reflect part of it in the negotiated price.
The process requires putting yourself in the buyer’s shoes and understanding how each buyer will value the company and where that buyer sees unique value.
Why Does Each Buyer Need a Different Value Proposition? [25:13]
Philip Palumbo: That is why owners bring in an advisor—to uncover the value, understand the buyer’s perspective, and help maximize the outcome.
Alan Scharfstein: Exactly. Selling a business is a time-consuming process, and most owners will do it only once in their lives.
The owner has to prepare the company, evaluate each buyer, present the business effectively, and explain the value proposition. That value proposition may be different for every buyer.
Most business owners do not have extensive experience doing this, and they already have a full-time job running the company. Taking on the entire sale process in addition to operating the business can be difficult to do well.
How Can a Competitive Sale Process Increase Valuation? [26:39]
Alan Scharfstein: Another important point applies to both strategic and financial buyers: when a sale process is run properly and creates competition, valuation can increase.
A business is ultimately worth what a buyer is willing to pay. In some situations, the competitive process itself creates additional value because qualified buyers know they are not the only interested party.
We have seen cases in which we initially believed a business might sell for five, six, or seven times EBITDA, but a particular buyer ultimately valued it at 12, 13, or 14 times EBITDA because the opportunity was worth much more to that buyer. Those outcomes depend on the specific business, buyer, synergies, market conditions, and process; they are not guaranteed. But they illustrate why a seller should understand buyer-specific economics rather than relying only on a generic industry multiple.
Why Alan Scharfstein Founded The DAK Group [27:23]
Philip Palumbo: Alan, this has been an excellent discussion of business exits. Please tell the audience more about The DAK Group and why you founded it.
Alan Scharfstein: I founded The DAK Group 40 years ago for a specific reason. At the time, the M&A market had excellent firms handling very large transactions. Firms such as Goldman Sachs and Morgan Stanley were well suited to billion-dollar deals, while business brokers handled small transactions.
There was a gap in the middle. An entrepreneurial, family-owned, or privately held business could be too small for a large Wall Street firm but still require a sophisticated sale process, strategic advice, transaction preparation, and experienced execution.
I did not believe enough firms were serving that market well. I started The DAK Group as a one-person operation in the basement of my home. At the time of this interview, the firm had grown to 37 professionals and had completed more than 800 middle-market, privately held transactions, including sales to public companies, private companies, and private equity firms.
We built the firm to provide middle-market owners with sophisticated advice and a highly focused process. I am always happy to speak with an owner who wants to discuss the future of a business and evaluate the available options.
The best way to reach me is by email at ascharfstein@dakgroup.com.
Philip Palumbo: Alan, thank you for your time. You were excellent, as always, and we will be in touch.
Alan Scharfstein: Phil, thank you very much.
